Digital unlocks the profitability of product cost analytics

July 18, 2018

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A BizTech Byte

All companies would like to get their new products to market more quickly and below their cost goals. But how? One answer is to take advantage of emerging digital tools that can help companies gain cost transparency and foster greater internal and external collaboration across the product team. These emerging tools inform critical design, sourcing and manufacturing decisions by helping to quantify product cost goals in a new way, segmenting unnecessary product costs from those required to deliver innovative products that delight customers.

Getting smarter about true product costs

Consider product cost reviews. According to Accenture Strategy research, fewer than 20 percent of companies have instituted Zero-based Supply Chain (ZBSC) initiatives that look at cost of goods sold (COGS) to determine what products “should-cost”.1 Instead, most organizations conduct static cost reviews and tend to focus attention on cost outliers. This approach is a big problem because costs regularly change and prolonged exposure to commodity and labor market fluctuations can be very costly. Just one example: In a manufacturing industry such as automotive, our experience suggests that volatile commodities can affect gross margins by as much as 40 percent.

Fewer than 20% of companies with Zero-based Supply Chain initiatives look at cost of goods sold (COGS) to determine what products "should-cost".

Furthermore, current product cost reviews in most companies only show a small slice of the full picture. They tend to be narrow in scope, lack scalability and fail to address many key cost drivers. In fact, when analyzing potential financial impacts, most organizations typically don’t consider the full equation of material, labor, overhead burdens, SG&A allocations, and supplier profit expectations. Moreover, it’s common in many companies for sourcing to focus on parts and commodity pricing, when what really matters is the overall product cost.

Gain competitive advantage

Our research has discovered there is an opportunity for organizations to gain a competitive advantage as only 13 percent of companies are currently investing in enabling technologies to further agility and efficiency.2 New analytics tools can help a company not only monitor product costs in real time, but also build predictive models that show what a product is likely to cost over a defined time horizon. This continuous stream of current and future data allows a company to be proactive—reducing the chance of unknown or unexpected cost increases undermining its competitive position and margins.

13%

Companies that are currently investing in enabling technologies to further agility and efficiency

Leading companies are getting the message and are evolving how they look at cost analytics more broadly. They’re developing tools that incorporate cost models from hundreds or thousands of products rather than creating standalone should-cost models. With these product cost dashboards or control towers, companies can better understand cost sensitivities, more accurately predict changes in product margins, and make more informed product cost versus feature/specification decisions. For example, by enhancing its product cost capabilities, one consumer products company can now compare detailed costs and trends across more than 1,200 products, identifying potential cost opportunities from product design changes, lowering cost packaging and improving sourcing. As a result, this company enjoys incremental cost reductions of 4 to 6 percent.

Create digitally connected ecosystems

Forward-thinking companies also are embracing next-generation collaboration tools that can help create a digitally connected ecosystem to replace the traditional manual, reactive and sequential product development process—which acts in practice like a bus making stops along its route. This outdated approach stifles collaboration, undermines cost management, and hinders innovation. As a result, cost fluctuations aren’t easily shared among the “bus stops”—procurement, finance, engineering, and sales—which means missed opportunities to optimally design and price products in the market. Furthermore, poor cross-functional communication can severely hamper speed to market. According to Accenture research, 79 percent of new products miss their launch date due to longer iterative cycles of new product development processes.3

Digital collaboration tools turn the bus route into a tightly integrated web, fostering robust collaboration across enterprise functions and with external suppliers. New technologies can also help standardize cost elements and make them transparent to all involved parties. Not only does this substantially cut time to market, it also can dramatically enhance SKU/parts rationalization as one consumer durables company recently found. With its teams working together more closely, the company was able to reduce its direct costs by 7 to 10 percent, component count by 35 percent, and its overall supply base by 60 percent.

With ecosystems becoming more complex and co-dependent, and traditional design/plan/source/make/distribute value chains giving way to collaborative and agile design, source, and manufacture relationships, reliable insights into product costs and value are more critical than ever. By using new cost modelling and visualization tools to gain a deeper knowledge of products’ true costs, as well as to forge better internal and external collaboration, companies can bring desired products to market more quickly while maintaining a highly competitive product cost structure. That’s a concept that every company can rally around.